Choosing What Works for a Change

George L. Cooke, President and Chief Executive Officer, The Dominion of Canada General Insurance Company and Past President, The Empire Club of Canada; Michael Adams, Student, Parkdale Collegiate Institute; Grant Kerr, Associate Minister, St. Paul's United Church, Brampton; Jake Epp, Interim Chair, Ontario Power Generation; Rita Burak, Chair, Hydro One; Howard 1. Wetston, Chair, Ontario Energy Board; Dr. Bryne Purchase, Deputy Minister of Energy, Province of Ontario; John A. Campion, Partner, Fasken Martineau DuMoulin and Past President, The Empire Club of Canada; Donna Cansfield, MPP, Parliamentary Assistant to the Minister of Energy and Member of Provincial Parliament, Etobicoke; David Goulding, President, IMO; and Rebecca MacDonald, Chair and Chief Executive Officer, Energy Savings Income Fund.

Introduction by John Koopman

In 1879 Thomas Edison stunned the Americas when he invented the light bulb. However, he needed a reliable power source if his light bulb was ever going to make any money. So as he refined his light bulb, he also sought a way to generate and transmit the electricity his bulb would need.

In 1882, in lower Manhattan he opened his Pearl Street generating station. The station had one small generator and produced enough electricity for about 800 light bulbs.

The industry's early days were chaotic and uncertain; different companies supplied electricity for different needs. One company sold street illumination, another residential lighting, and yet another streetcar service. These fledging independently operated utilities competed with one another and were incompatible using different equipment, voltages and frequencies. Most utilities gave away light bulbs and electric irons in order to encourage electricity use.

Alternating current (AC) fought direct current (DC) power for market domination. Edison had established a DC service. His great rival George Westinghouse had marketed AC technology.

The otherwise great Edison started a smear campaign, arguing that AC technology was unsafe to use. In one public experiment Edison set up a 1,000-volt Westinghouse generator and executed a dozen animals, showing just how dangerous AC current was.

In June 1888 the State of New York established electrocution as the state's method of execution. A committee had to decide if it would be a DC chair (supplied by Edison power) or an AC chair (supplied by Westinghouse power). Edison wanting to show the danger of AC power vigorously lobbied for the use of Westinghouse AC power for the electric chair. Edison believed the electric chair would rather tangibly show the danger of AC power and make consumers unlikely to want the same type of electrical service in their homes.

Edison won the battle and the first electric chair used Westinghouse's AC power. Westinghouse protested vehemently and refused to sell an AC generator to the New York State prison authorities. George Westinghouse even funded appeals for the first few sad souls who were sentenced to death by electrocution. It was for naught. At 06:30 a.m. on August 6, 1890, William Kemmler was executed by AC current. There is speculation Edison bribed a journalist; that morning's paper carried the headline: "Kemmler West inghoused." For several decades thereafter death by electric chair was called being "Westinghoused."

In energyland Ontario, whether it is electric deregulation proposals, or taxpayers who will in the end have to pay the massive stranded debt, or senior energy company executives, much has been Westinghoused.

Mr. Duncan's challenge is to find a positive productive way forward for the industry, energy users, and taxpayers.

The Hon. Dwight Duncan was first elected to the Ontario legislature in June 1995. He is currently Government House Leader, Chair of Cabinet and Minister of Energy.

The Minister served on Windsor City Council from 1988 to 1994. He also served on the staffs of former deputy prime minister the Hon. Herb Gray and former Ontario labour minister Bill Wrye. Minister Duncan has degrees In Economics and Commerce, as well as a Master of Business Administration (MBA).

Dwight Duncan

Thank you, John, for that kind introduction.

I must confess that I am a bit overwhelmed by the size and composition of the crowd. Recognizing the perilous nature of my responsibilities, I am reminded of something Churchill once said. When one of his friends asked, "Aren't you impressed to see so many people gather to hear you speak?" he replied, "No--because 10 times as many would come to see me hanged."

Today, I will outline a plan for the electricity sector that will encourage the development of a new reliable supply, promote a culture of conservation, lessen the environmental footprint of our undertakings, produce stable prices for small consumers, afford large consumers the benefits of a competitive market, and enhance Ontario's competitiveness in electricity pricing.

Beyond all else, we will create stability in a sector that has been rocked too often. This plan recognizes the need to create a climate that welcomes private investment, but understands that for a sector to flourish, small consumers must embrace it.

Finally, the plan I will outline recognizes that ratepayers must pay the true cost of the electricity they consume. Price caps, which have been in place for much of the last decade, must end. They didn't work in California, and they haven't worked here. We are dangerously close to an unforgiving precipice, which threatens to undermine Ontario's continued prosperity.

Our policy will not be bound by ideology, but rather by what works. Our reforms will chart a new direction in Ontario's history by establishing the foundation for our energy future.

Albert Einstein once said that "we have to divide up our time between our politics and our equations ... our equations are far more important, for politics are only a matter of present concern."

Well here's one equation that desperately needs solving.

Ontario now has about 30,500 megawatts of generation capacity. Between now and 2020, factoring in the growth of our economy, approximately 25,000 megawatts of our electricity capacity needs to be replaced. There is a matrix of possible solutions and problems. Risk can be measured exponentially if the wrong choices are made. You don't have to be an Einstein to see that the arithmetic in this equation is complicated.

For more than a generation, our electricity sector has been buffeted between extremes, and fraught with reversals, indecision, and malaise. Successive governments seemed to follow Yogi Berra's famous advice that "when you come to a fork in the road ... take it."

No more extremes. No more reversals. No more indecision. No more malaise.

Before I move on to the direction we've chosen, let me tell you what we've rejected.

We looked at the old Ontario Hydro model, but that put us $38 billion in debt. Some want to move back to that model. I've rejected it. I want to move forward.

We've looked at moving to a fully competitive market, but couldn't find one that worked anywhere.

We studied other jurisdictions to benchmark best practices. But you know what? There is no "right" way.

So we've chosen what we think is the best way--a balanced approach; an approach that recognizes the balance between conservation and adequate supply; an approach that recognizes the need to balance public leadership with private investment; an approach that will outlive this minister and this government; an approach that will begin to make up for over a decade lost in Ontario's electricity sector.

We have acted decisively already:

• We've replaced the previous government's 4.3-cent price cap. In doing so, we have signalled that prices should be set by an independent regulator, not by politicians.

• We've demonstrated that we are serious about conservation. We will cut overall demand, and the government will cut its own consumption, so that we can lead by example. We're going to be a world leader in conservation.

• We remain committed to replacing coal-fired electricity generation in the province. In so doing, we will never put Ontario consumers in jeopardy, and will be totally satisfied that adequate alternatives are in place before we replace coal.

• We've announced that we will be seeking proposals for 2,500 megawatts of new electricity capacity through either generation or demand-side management initiatives. We're the first government in Ontario's history to put demand management on an equal footing with generation, and we expect the call for proposals to be ready in the next few weeks.

• We've also announced that we would be seeking proposals for 300 megawatts of renewable generation, which will help us meet our target of 1,350 megawatts of new renewables by 2007. This is just a first step in what will be an extremely important part of our energy future. We expect to initiate this call for proposals as early as next week. Again, we intend to be a world leader in the use of renewable energy.

We have moved quickly, boldly and prudently to stabilize Ontario's electricity sector.

As with the electricity grid itself, which precisely balances supply and demand, reforms to the electricity sector must be a matter of finding the right balance between our goals. Balance between the need for prices that reflect the true cost of electricity, and consumers' need for affordable and predictable prices. Balance between the need for private investment in supply, and the recognition that electricity is a fundamental public need. And balance, I would remind you, lies in the centre, not in extremes.

And so, in June, we will be introducing legislation for sweeping institutional reform that would see a combination of a fully regulated and a competitive electricity sector. There would be a split between regulated prices for electricity coming from major nuclear and baseload hydro generation assets, and a healthy, competitive market for all other generation. This combination of pricing mechanisms would result in a blended cost for consumers.

Ontario Power Generation's nuclear and baseload hydroelectric assets would be regulated by the Ontario Energy Board, that would set regulated prices, while the wholesale price for other electricity generated in the province would be set by the market, which would continue to operate as it does now.

Fixed prices for a large part of the energy consumed in the province would keep the overall blended price for electricity relatively stable.

One of the biggest challenges the McGuinty government faces is balancing the needs of small- and large-volume electricity consumers.

Residential and small business consumers make up the vast majority of ratepayers in the province, but consume only 50 per cent of Ontario's electricity. Their priority is stability. My constituents in Windsor neither know nor likely care about the subtleties of electricity markets. But they do know that they want a price for electricity that they can depend on, and they deserve no less.

There are far fewer large-volume consumers--many of you in this room represent companies that fall into this category--but they consume the other 50 per cent of electricity in the province. Their priority is flexibility, so they can organize themselves to be as competitive as possible.

It is crucial to the McGuinty government that our reforms meet the needs of both groups of consumers in Ontario.

To that end, residential and small business consumers in Ontario would be offered a standard rate plan. Not a price, a plan. it would be adjusted periodically to ensure people pay the true cost of electricity over time, but the plan would remain stable over the course of each year. The Ontario Energy Board would approve the plan, and guarantee public input and fairness.

It would also ensure that consumers can take advantage of time-of-use rates so that they would have the opportunity and incentive to shift consumption from periods of high demand and prices to periods of lower demand and prices.

Consumers and small businesses that do not wish to participate in the regulated rate plan would be free to purchase their electricity from energy retailers or directly through the market.

Our aim is not to limit options, but in fact to improve them. No one will be forced to put up with the gross instability of the market, but at the same time, the annual rate-plan option would not be forced on people interested in taking advantage of other opportunities.

Medium and large businesses will continue to have flexibility. Large consumers would continue to have all of the options afforded to them by the market. This flexibility includes having the opportunity and information to pursue co-generation or distributed generation opportunities.

Distributed generation, which is also attractive from a security perspective, holds significant promise for the environment, as it suggests an electricity system that minimizes massive transmission networks, and focuses resources only where they are absolutely necessary. Our desire is to help Ontarians unlock the potential for efficient electricity generation that is around them, and we will remove barriers, free up resources and bring new thinking and new ideas to the challenges that lie before us.

Our next actions are focused on ensuring long-term supply adequacy in the province.

Given the long lead times required to bring new capacity on-line, and the need to create stability in the electricity sector, we need to reorganize our institutions in order to ensure efficient management of the sector over the long term, and to attract new investment to Ontario.

Changing the way electricity is priced is simply not enough.

Our model includes a strong public leadership role, clear accountability, and a co-ordinated approach to addressing the growing gap between electricity supply and demand.

We estimate that in order to meet the looming supply-demand gap, an investment of $25-40 billion will likely be required to keep the lights on over the next 15 years. This is one of the largest peace-time investments in Canadian history.

To that end, we propose to establish a new independent body called the Ontario Power Authority. It is our intent to have this new institution in place and operational by early next year.

The Power Authority would have the obligation to ensure long-term supply adequacy in Ontario, so that never again will we find ourselves in the predicament we're in today.

It would forecast resource needs, and prepare an integrated system plan for conservation, generation and transmission. Everyone would know what generation we need, and where it's necessary. Moreover, if transmission might provide the solution to a supply problem, then a single authority would be responsible for making that determination.

However, if this information and transparency is not enough to drive the private sector to invest in Ontario, then the Power Authority would have the responsibility and tools to call on the private sector to build new generation capacity or deliver additional demand management. A competitive and transparent procurement process would foster innovation and creative approaches to meeting our supply needs.

The continued existence of the market is a crucial incentive for private investors to enter Ontario and support the construction of the thousands of megawatts of electricity generators that we need to build over the next 15 years. It's important that private-sector investments made in Ontario's power supply be encouraged.

The recent turmoil in our electricity market has shaken investor confidence. We must send a clear and unambiguous message that Ontario is a good place to invest, and that politics will not impair the private sector's ability to earn a fair return on their investment.

In other words, the requests for proposals our government has announced for 2,500 megawatts of new capacity or demand management initiatives and 300 megawatts of renewables would be just the first of many future opportunities for the private sector to help us close the looming gap between supply and demand in the province.

Ladies and gentlemen, Ontario's electricity sector will become a great place in which to invest and earn a fair return.

Having a fully functioning electricity sector is not only about generating raw power. The government must also be concerned with conservation, the use of renewable energy and the security and diversity of the electricity supply in Ontario.

Therefore, explicit directive power would be given to the Ministry of Energy with respect to targets for conservation, the use of renewable energy, and the overall supply mix of electricity in the province. The Ontario Power Authority would be charged with achieving these and other targets set by the government, and would include them in its system planning.

Our plan will help build a conservation culture, which the McGuinty government believes is a cornerstone of Ontario's long-term energy future.

A megawatt saved is every bit as good as a megawatt built.

Therefore, a new Conservation Secretariat, headed by a Chief Conservation Officer, would be established as part of the Ontario Power Authority. The Conservation Secretariat would lead Ontario's efforts to engage and empower consumers across the province, and would develop province-wide programs that provide real incentives for Ontario's homes and businesses to conserve, and to save money. It would also monitor the progress we are making.

Our sector reforms would also support conservation at the local level. The Ontario Energy Board would also establish a framework to help local distribution companies (LDCs) deliver energy conservation programs as appropriate. The current disincentives for local distribution companies would be removed, and LDCs would benefit from empowering their customers to conserve electricity and making their own systems more efficient. We believe that LDCs can and should be agents of change at the local level to promote conservation. LDCs are extremely well placed to encourage conservation and energy efficiency in the communities they serve, and we will need all their expertise, ingenuity and leadership to help build that conservation culture in Ontario.

It should be clear to everyone that our government doesn't see conservation as a flash in the pan, or a fad of the moment; we see it as a real opportunity to help Ontarians prosper, and as a valuable strategy to enhance the competitiveness of our province.

The Premier and I had the opportunity to review this speech earlier. As he informed me that he would do the speech outlining our conservation initiatives, I was reminded of Margaret Thatcher's famous missive that "I don't mind how much my ministers talk, as long as they do what I say."

Seriously though, Premier McGuinty has made the rebuilding of our electricity sector and conservation cornerstones of his government's agenda. He believes strongly, as I do, that our success in this endeavour will be an important component of this province's future economic development.

Do not underestimate his determination to fix these problems, fix them right, and fix them fast.

The changes I have just described would be a major step forward in delivering his government's vision of the electricity sector.

However, this is no easy undertaking. In addition to the legislation we will introduce, there will be many complex and technical regulations that will need careful and thorough attention.

Accordingly, the legislation I will be introducing in June will be sent to Committee for full study and evaluation over the summer, and we are hopeful that it will receive passage this fall.

We will address transmission and distribution issues over the next 12 months. Without a thorough examination of the network side of our electricity infrastructure, it will be impossible to bring about the changes that are needed to develop a sale, secure supply for Ontarians.

The composition of that supply will be the subject of an announcement later this year. In it, we will lay out the government's view of where our supply will come from.

The last piece of this complex puzzle is the future of Ontario Power Generation.

As the custodian of over 70 per cent of the province's existing generation capacity, the government must set the course and direction for OPG. We recognize the mismanagement that the company has suffered over the past five years, and we intend to set it right.

Today, I'm pleased to announce that lake Epp, who has been interim chair of OPG has agreed to become its permanent chair. Jake has done an outstanding job, and has brought wisdom, insight, and unshakeable calm to a role that very few others would have accepted. He has the utmost confidence of the McGuinty government, and we thank him for working so tirelessly over the past several months.

At the same time, we are immediately commencing a search for nine new members of OPG's Board of Directors. Within the next few weeks I will begin to announce these appointments. It is our intention to de-politicize the Board of Directors of this corporation. It is our intention to find directors who have expertise in corporate restructuring, change management and yes, running nuclear operations. Their job, along with the shareholder, will be to set the future direction of the company to make recommendations and decisions about its structure and its future, and to get the old 800~pound gorilla off your backs.

Today I'm also announcing that we are immediately beginning the search for a new CEO. Before I give you more details, I want to take a moment to thank Richard Discerni, who stepped into this position at probably one of the lowest moments in both OPG and Ontario Hydro's history. He has served in this capacity as he has served in other public capacities with great integrity, sound judgment and always with the interest of the province at heart. We are grateful for his help to date.

The process for selecting a new CEO and board will be open and transparent. The days of untendered contracts rewarded to political friends are over. Today marks the beginning of a new era of corporate responsibility at OPG.

The government, with the board, will develop a new Shareholder's Agreement, which will make explicit its performance expectations for OPG, and better define the relationship between the government and the company. We will make this public as soon as it is prepared and the new board is fully in place.

Just as we're taking the politics out of electricity pricing, we're taking the politics out of OPG.

There is no question that getting OPG back on the rails will not be an easy task. There are big decisions to make, and we're making them.

As does every other aspect of life, public policy involves many variables, some probabilities, and very few certainties. But this we know for certain: all else remaining constant, if Ontario's electricity system were left on the course it has been following, it would cease to serve us, cease to power our economy, and cease to be the great enabler it has been for a century. That's a certainty neither you nor I nor anyone in this province can live with.

We know we will need the ongoing benefit of the ideas, expertise and dedication of those in the electricity sector to meet the challenges that face us.

If we work together, we can build an Ontario that has an electricity supply that is the envy of our competitors and a magnet for investors. We can build an Ontario where consumers have both the stability they want and the reliability they demand and deserve. We can build an Ontario where the energy that comes through the wires stimulates the energy that makes us great, the energy that stimulates our growth as an economy and a society. I'm talking about the innovation of our businesses, the success of our schools, the compassion that marks our health-care system, the cleanliness of the air we breathe and the water we drink. We can build an Ontario with a standard of living and a quality of life that's second to none.

That Ontario, my friends, as the Premier often says, is ours to deliver.

Thank you.

The appreciation of the meeting was expressed by John A. Campion, Partner, Fasken Martineau DuMoulin and Past President, The Empire Club of Canada.